Electrifying rural Ethiopia: Boosting nonfarm enterprises and income through household electricity access

This study investigates the effect of household electricity access on non-agricultural enterprise ownership and income in rural Ethiopia, addressing a key gap in the literature. Drawing on two waves of panel data and relevant econometric techniques, electrification increases engagement in non-agricultural activities by 49 % at the household level. The Heckman two-stage model suggests a 39 % average monthly off-farm income gain among electrified households. However, recognizing limitations in this traditional framework—particularly its inadequate handling of endogeneity between electrification and income—we integrate a cluster-robust Two-Stage Least Squares (2SLS) estimation. This alternative confirms a stronger impact: a 59 % increase in average monthly nonfarm earnings. Moreover, electrification raises mean non-farm income by 46 % and 59 % among absolutely and multidimensionally poor households, respectively. However, its impact remains limited for agriculturally dependent, non-poor households. These findings underscore electricity access as a catalyst for enterprise growth and income diversification in underserved areas. Despite data constraints, the study presents robust evidence for targeted electrification as a means to reduce poverty and enhance welfare. The role of non-agricultural enterprises emerges as central to inclusive economic development and improved rural livelihoods, offering actionable insights for energy and development policy in low-income contexts.